Advisers see value in launching own investment firms

Late last year, Tim Lysaght and a few colleagues made the leap into the great unknown. They left the relative comfort of a sizable investment brokerage firm to start their own independent investment advisory firm.

Lysaght, Steve Jung and Abby Morgan started Eukles Asset Management, opening an office in the U.S. Bank Building downtown, after leaving Morgan Keegan & Co.’s Covington office in September. That continues a trend that has seen numerous investment advisers leave large brokerage houses to start their own independent firms.

The number of independent advisers nationwide has grown by about 10 percent over the past seven years, while the industry actually shrank 1 percent, said Tyler Cloherty, a senior analyst at Boston-based investment industry research firm Cerulli Associates. Independents’ assets under management swelled 22 percent, while the industry grew 1 percent.

“That’s the growth pocket of the industry,” Cloherty said.

The Eukles group – which also includes Lysaght’s sons Patrick and Brian – left Morgan Keegan not long after the Memphis, Tenn.-based firm agreed to pay $200 million to settle claims related to some of the firm’s employees failing to tell clients about the risks of investing in certain mutual funds. It gave the firm a stigma.

“It wasn’t a problem for our clients,” Lysaght said. “But it was if you were trying to get new business.”

The group also preferred making its own investment decisions and had its own system in place. It didn’t need the backing of a big firm.

Lysaght and his group, like many who have started their own firms, enjoy the independence. Most larger brokerage firms offer certain mutual fund groups to their clients. Some lean toward their own funds. But with an independent like Eukles, those factors – whether real or perceived – don’t even come into play.

“We don’t do any underwriting or have any funds, and we’re not product driven,” Lysaght said.

Jung and Brian Lysaght handle their own stock research. The firm is affiliated with LPL Financial, the nation’s largest independent broker-dealer, to handle trades and provide some back-office support.

But independent firm owners also lose the safety net of a larger firm’s services. They have to provide their own insurance coverage, office space and cover the other expenses that go with running a business.

“You don’t call tech support; you are tech support,” Jung said.

In fact, some people who go independent are great advisers, but quickly find out they’re not so hot as business owners, Cloherty said.

That wasn’t a problem for Jane Welch, a founder and owner of Focus Wealth Management in West Chester, who left Fifth Third Securities with five others in late 2008 to start their firm. But they quickly realized there were a lot of expenses that come with running an independent firm, from office costs to fees related to trades. However, she favors the freedom to make the investments she wants.

“I feel like I’m truly working for my clients now,” she said.

In her job with Fifth Third, for example, Welch wasn’t able to make alternative investments such as putting client money in private equity funds, hedge funds or real estate to reduce portfolio volatility. She does all of that now.

Large brokerage firm managers say they can offer the service and, in many cases, the investment freedom independents do. It’s a matter of personal preference for many advisers. Some of the biggest in town, such as Joe Evelo at Merrill Lynch, have worked for years at big brokerage firms and thrived.

Big firms can offer clients a one-stop-shop of financial services, including loans, credit cards and other services, said Greg Achten, who oversees Merrill Lynch Wealth Management in Cincinnati and Dayton.

And at bank-affiliated brokerage firms like Fifth Third, many clients come through the bank’s cross-selling efforts, Welch said. But going out on your own has its financial rewards, too. Advisers keep a greater portion of the business they generate. It’s about 80 percent, Welch said, while at Fifth Third Securities and elsewhere that’s more like 35 percent to 40 percent. Of course, independents have to take their expenses out of the sales they keep.

And independents can generate powerful growth. Eukles has $330 million in assets under advisement. That includes $60 million it manages with full discretion, with the rest mostly through retirement plans in brokerage accounts. Focus Wealth has about $200 million under management.